MURRAY DARLING BASIN WATER MARKETS OUTLOOK AND REVIEW

Transcription

1 MURRAY DARLING BASIN WATER MARKETS OUTLOOK AND REVIEW

2 Foreword The Marsden Jacob Associates Water Markets Outlook and Review reflects the year gone past and takes a peek into the season just started. Last year witnessed strong demand for both temporary and permanent water across the Murray-Darling Basin (MDB). Entitlement prices are broadly at all time highs across the Southern Connected MDB after a year unprecedented price jumps, whereas the Northern NSW entitlement markets have been and are expected to remain steadier. Reduced water availability across the Basin is anticipated to be a key driver for allocation markets. And yes, we do acknowledge that we skipped a few quarters last year with our market notes. Amongst other things we were busy building Waterflow.io, our water market information application. Want to know more about Waterflow? Our contact details are at the back of this document, please get in touch! Marsden Jacob Associates Water Markets team Marsden Jacob 218 MDB Water Market Outlook and Review II

3 MDB Water Markets Outlook Reduced water availability across the Murray-Darling Basin (MDB) is anticipated to be a key driver for allocation markets in Permanent entitlement markets are expected to be steady in the north, whereas the Southern Connected MDB markets start the season with prices at all-time highs for most entitlement classes. Southern Connected MDB allocation market firm start for the year Lower water availability has seen the Southern Connected MDB allocation market open with high prices across all systems. Trade limits are again expected to contribute to price differences early in the water year. As the water season drew to a close, forward market trades for were contracted within the range of $19-25/ML across the Southern Connected MDB. Early allocation prices have been in line with, and even exceeded these forward water prices as there is considerable pessimism about the climate and water availability outlook. Consequently, the market has witnessed the highest prices since late 215, with trades being conducted at as high as $325/ML. Nevertheless, trading activity has been generally thin thus far as most irrigators are understood to be employing a wait and see approach early in the season. Up until recently, prices have been highest in the Murrumbidgee where interstate and inter-valley supply is still cut off due to the inter-valley trade (IVT) limit being in place. However, the Murrumbidgee price premium to other trading zones hasn t been as significant as anticipated. Marsden Jacob s estimate of the current water availability, taking into account the opening announced allocations and estimated volumes that were carried over across Southern Connected MDB and excluding environmental water holdings, is that the availability deficit compared to the season start a year ago is approximately 1,2GL (due to both opening allocations and the amounts carried over being much lower than the year before). Hence, it is not surprising that the current market sentiment and expectation is that temporary water prices will be higher than last year. This sentiment is also supported by below average inflows to storages, and the BOM August to October forecast indicating very much below average rainfall over the main irrigation areas in the Southern Connected system 1. A comparison of Southern Basin storage volumes 2 at the start of the season is presented in Table 1. Whilst storage levels are lower compared to last season s start, there s over 1,GL of more water in storages compared to October 215 (the last time temporary prices got to $3/ML). Table 1. Southern Basin dam storage levels July 218 July 217 October 215 GL % Full GL % Full GL % Full Southern Basin Storages Total 9, % 11, % 8, % Source: MDBA Many trade limits have already come into play early in the water year resulting in segregated sub-markets. Figure 1 outlines the trade limits that were in place at the time of writing this report 3. 1 Source: BOM Climate outlook for August to October, available at shtml (Accessed 27 July 218) 2 Including Menindee lakes and excluding Lower Lakes and Ovens storages 3 NSW to Vic trade is effectively closed, albeit at the time of writing there was 3.3GL of capacity to trade from NSW to Vic. Marsden Jacob 218 MDB Water Market Outlook and Review 1

4 Figure 1. Current trade limits in the Southern Connected Murray-Darling Basin (as of 27 July 218) From To 1A A Greater Goulburn 6 VIC Murray - Above Barmah Choke 7 Vic Murray - Below Barmah Choke 1 NSW Murr U/S Barmah Choke 11 NSW Murr D/S Barmah Choke 12 SA Murray 13 Murrumbidgee 14 Lower Darling NSW TO VIC LIMIT NSW TO VIC LIMIT GOULBURN TO MURRAY LIMIT OUT OF LOWER DARLING INTO MB INTO LD TRADE ALLOWED TRADE RESTRICTED Although it s too early to tell where the prices are going to end up this season, we see the following factors driving market performance early in the water year: Murrumbidgee: It will be interesting to see whether a similar trend occurs this season as happened in where a strong early purchase activity by cotton growers was witnessed. As the opening allocation for general security entitlements is low (now at 5%) and the IVT restriction limits the supply to Murrumbidgee, high demand from any buyer group could mean that there is a significant amount of upward pressure in the Murrumbidgee allocation prices. Hence, we have not been surprised to see allocation prices continue to rise and reach $3 per ML in the Murrumbidgee early in the season. Clearly market participants with access to groundwater will utilise that option, and intermediaries are already reporting high demand for temporary groundwater with increasing prices. Goulburn: If the Goulburn IVT remains in place for a prolonged time period 4 effectively segregating it from the Murray market, it is anticipated that the prices will be lower in the Goulburn than in the rest of the Southern Connected MDB. However, Goulburn-Murray Water has indicated that the current dry catchment conditions may see transfers of IVT water from the Goulburn system to the Murray system commence as early as in August 218, which would have an offsetting impact on the trade limit 5. Nevertheless, in the Goulburn the 32% opening allocation (now 34%), combined with carryover water and a reasonably good allocation outlook even under a dry scenario, should mean that most irrigators should not be in any rush to purchase water early in the season. That said, we ve been very surprised to see some early trades being done at as high as $3 per ML. It will be also interesting to see whether those market participants with a Goulburn entitlement tagged to the Murray are still able to bypass the Goulburn to Murray IVT restriction, and effectively use their Goulburn water in the Murray. Last year Murray customers with tagged accounts were able to buy cheaper water in the Goulburn and use that in the Murray. If permitted, demand associated with this loophole may again contribute to the prices in the Goulburn performing in an unexpected manner. VIC/NSW Murray above Choke: Should the Barmah Choke trade limit kick in, this would put downward pressure on allocation prices for trade zones above the Choke. Victorian Murray (Zone 6) water holders are in a better position to wait and see how the season evolves with a 41% opening allocation (now 47%). In contrast, NSW Murray (Zone 1) irrigators have not received any general security allocation and the outlook is not encouraging in terms of future water availability. Producers of lower value crops such as rice need to decide whether they should grow a crop this year or sell their carryover and any future announced allocation. Should prices sustain at over $2/ML it is anticipated that a significant proportion of rice growers will be priced out of the market. However, sellers above the Choke need to be mindful of the NSW to Vic trade limit restricting water transactions early in the season (especially if the Barmah Choke restriction is also in place). 4 This occurred in and is expected to happen this season as well due to tagged entitlements dragging the IVT balance down every time high reliability allocation increases in the Goulburn. 5 Marsden Jacob 218 MDB Water Market Outlook and Review 2

5 SA/VIC/NSW Murray below Choke: SA Murray water holders are likely to sit back early in the season as their water availability is high compared to other trade areas with a full 1% allocation from 1 July. To a slightly lesser extent, the same applies to Victorian Murray (Zone 7). High value crop growers with general security licences in NSW Murray (Zone 11) may be in the market for allocation water as their opening allocation was zero, albeit most such growers would mostly rely on high security entitlements (also, in NSW Murray access to carryover is better than in the Murrumbidgee, the limit being 5% vs 3% for general security entitlements). Moreover, according to intermediaries many such growers have already secured large quantities of water through forward contracts. Therefore, we would be surprised to see strong buying demand early in the year from trading zones below the Choke, especially since Victorian Murray high reliability allocation is forecast to reach 1% even under dry conditions 6. That said, we ve been very surprised to see some early trades being done at as high as $3 per ML. Whilst predicting prices for the rest of the season is hard, some interpretations of upcoming market movements can be made based on the historical allocation market behaviour. Specifically, as water markets have matured, we ve witnessed a notable change in the allocation trade patterns across the water year. A key development is that previously very little trading occurred in the early months and prices peaked in the summer months during the high use period, with irrigators effectively buying water when they need it. Over the last couple of years buyer have been getting in earlier, and market prices can peak multiple times within the season reflecting underlying drivers. This indicates that markets have matured and participants are becoming much more sophisticated in their sale and purchase decisions. Figures 2 and 3 present these then and now price curves against plotted Murrumbidgee allocation trades in and These figures imply that in the more mature allocation market peak water use period does not necessarily equal to prices peaking during that period, and that market participants are more strategic in their purchasing and prefer to plan them prior to need. Planning in advance according to outlooks and forecasts, and trading allocation accordingly, is an especially strong driver during the last quarter of the season. Marsden Jacob believes that, in the absence of a significant change in water availability, the Southern Connected MDB allocation market is more likely to resemble the mature market price curve in rather than act otherwise. However, it is also evident that supply or demand side shocks can still cause prices to depart from the standard trading pattern. Figure 2. Immature allocation market price curve vs. Murrumbidgee temporary market prices Marsden Jacob 218 MDB Water Market Outlook and Review 3

6 Figure 3. Mature allocation market price curve vs. Murrumbidgee temporary market prices Northern NSW allocation market water availability the key driver After two seasons of relatively high water availability, the Northern NSW catchments are facing a year of lower availability, restricting allocation trade activity in the water year. Marsden Jacob expects that commodity prices and water availability will once again drive the allocation market across the northern MDB over Table 2 presents a comparison of volumes in Northern Basin storages. Compared to last season s start there is significantly less water in storages. Table 2. Northern Basin dam storage levels July 218 July 217 GL % Full GL % Full Northern Basin Storages Total 2, % 4, % Source: MDBA As there s less water in storages, the opening announced allocations in Northern NSW have been lower compared to last season. Also the amount of carryover left on the accounts has diminished in all catchments. Table 3 compares the catchment level water availability at the season start this year to the year before. Table 3. Table vs water availability comparison in Northern NSW Allocation 1 July 217 Carryover 1 July 217 Allocation 1 July 218 Border Rivers GS-A 1% 23% 9% (combined) Border Rivers GS-B 8% % Carryover 1 July % (combined) Gwydir GS % 6% % 22% Lachlan GS % 18% % 63% Macquarie GS 36% 73% % 54% Lower Namoi GS % 8% % 19% Upper Namoi GS 1% N/A 1% N/A Source: WaterNSW, DoI Water Marsden Jacob 218 MDB Water Market Outlook and Review 4

7 Supported by buoyant cotton prices, in those catchments where sufficient water is available to growers such as the Lachlan, Macquarie and Border Rivers trading activity is expected to be more frequent and prices are likely to continue their upward trajectory. Early trades in the Lachlan are in line with this; allocation prices have reached $3 per ML, the highest since the Millennium drought. Elsewhere lack of water availability will restrict large-scale trading activity. For instance, due to the persisting dry conditions and diminishing storage levels, block releases will likely be used in both in the Namoi and in the Gwydir to allow delivery of irrigation water. Hence, without significant inflows supply to the market will be low. In terms of prices in these areas, similar levels may be witnessed as in (up to $45 per ML). However, the market feedback is that such exceptionally high prices can only be sustained to finish off a crop and not to fully irrigate a crop. Hence, if the water availability is lower to begin with, the irrigators ability and willingness to pay very high prices is anticipated to be constrained and there may not be much demand at those prices even if there were sellers in the market. Southern Connected permanent entitlement will the price increases continue? After set new records across most entitlement classes in the Southern Connected MDB, the question on everyone s lips is whether this will continue. At the moment nothing suggests that permanent water prices would be softening to any great extent. Despite record prices being achieved month on month during the second half of in the Southern Connected MDB entitlement market, based on the discussions Marsden Jacob have had with market stakeholders, the market expectation for the foreseeable future is that prices for high security/reliability entitlements will continue to rise as multiple buyer groups are still looking to secure more entitlements. Should temporary water prices remain high, this will also have a price increase impact for the entitlements sold wet with allocation. However, the consensus is that the pace of price increases will slow and the unprecedented price jumps that were witnessed last water year are unlikely to continue in , and more steady increases across the entitlement types are now anticipated. However, the consensus is that the pace of price increases will slow and the unprecedented price jumps that were witnessed last water year are unlikely to continue in , and more steady increases across the entitlement types are now anticipated. Table 4 illustrates the rapidity of the recent price increases - compared to market prices at the time of our last market update in November 217, entitlement prices in the Southern Connected MDB are now approximately 2-5% higher (depending on the entitlement). Table 4. Market price comparison of selected Southern Connected MDB entitlements Region Entitlement Type Market Price Nov '17 Current Market Price SA Murray Class 3 $3,2 3,4 $4,5 4,25 VIC Murray above Barmah Choke High Reliability $2,65 2,8 $3,4 3,55 VIC Murray above Barmah Choke Low Reliability $3 35 $4 5 Vic Murray below Barmah Choke High Reliability $3,4 3,5 $4, 4,2 Vic Murray below Barmah Choke Low Reliability $35 4 $5 6 Goulburn High Reliability $2,8 3, $3,35 3,55 Goulburn Low Reliability $3 35 $45 55 NSW Murray above Barmah Choke General Security $1,3 1,45 $1,9 2, NSW Murray below Barmah Choke General Security $1,45 1,55 $2, 2,1 NSW Murray below Barmah Choke High Security $4, 4,2 $4,9 5,5 Murrumbidgee General Security $1,6 1,7 $2, 2,2 Murrumbidgee High Security $3,9 4,5 $5, 5,2 Marsden Jacob 218 MDB Water Market Outlook and Review 5

8 In addition to the market expecting more steady price increases, there are also some signs of the NSW Murray and Murrumbidgee general security entitlements being fully valued some recent water auctions have seen multiple parcels either passed in or sold at prices lower than the recent all-time high sales that occurred between $2,-2,2 per ML. The market sentiments is that continued price growth will further place some industries with relatively lower margin returns (e.g. dairy and rice) in a position where purchasing permanent water is not financially sensible, exposing them to risks associated with allocation market products. Whereas, we understand that higher value crop producers (e.g. nuts) are able to sustain high prices as their margins are underpinned by strong commodity prices and global demand. Institutional investors remain a relatively small proportion of the market, but they have an important role in providing beneficial liquidity in the spot, lease and forward markets. For institutional investors achieving high returns has become harder when permanent water prices have increased. For example, to get a consistent 6% return on an entitlement costing $5,1 per ML, the allocation sale (via a lease, forward or spot sale) would have to be undertaken at over $3 per ML year on year if a typical hold and sell strategy is applied. However, some of the institutional level investors are also applying hybrid strategies where commodities are grown to create returns. Hence, even though from a pure water investment perspective buying entitlements at high prices may not be financially feasible, investors may still see an upside in the market through other strategies. It also has to be remembered that many of the investors have accumulated water assets over time, and buying additional entitlements at current prices does not necessarily have a major impact on the average price of their portfolio. It will also be interesting to see what kind of an impact the Australian Government s $1.5 billion Murray-Darling Basin Water Infrastructure Program will have on the entitlement market. In this particular program on-farm projects will be only eligible in Queensland, South Australia and the Australian Capital Territory, whereas any water users holding eligible water rights within the Basin may apply for funding for urban, industrial, off-farm and metering projects. As the entitlement prices appear to be underpinned by strong commodity market performance for key irrigated commodities, this does raise some questions. Specifically, should there be significant changes in the global supply and demand balance of cotton and nuts, this could result in downside risk in the market because commodity prices could fall. For example, regarding cotton Rabobank is anticipating some downside risk to the historically high prices, albeit from Australia s point of view this may be offset by the Chinese import demand. In relation to almonds, in California a record-breaking crop is predicted for 218. However, for Australia the increased supply in the US may be offset by the new tariffs imposed by China on US tree nuts. This would mean that Australian almonds would be preferred to satisfy the Chinese demand, especially since from 219 Chinese importers will pay no duties on Australian almonds as per the China-Australia free trade agreement. Hence, in the absence of a significant market shock for key commodities in the Southern Connected MDB, we don t anticipate witnessing a strong decline in entitlement prices in Even if the year ends up being a wet one, contrary to current outlooks, with high allocations and low temporary water prices, we believe it would take several consecutive wet years before entitlement prices would decrease significantly for high security/reliability entitlements. Where general security entitlements are concerned it will be interesting to see whether the recent signs of slightly softening prices indeed are an indication of these entitlements having reached their full value, because low opening allocations and rather bleak outlook for increases may have a short-term psychological impact on market values as well. For Victorian low reliability entitlements the market prices typically soften after the change of water year as these entitlements are mostly bought as a carryover instrument and are not allocation yielding assets on an average year. Should any decline occur, prices are more than likely to recover during the second half of Marsden Jacob 218 MDB Water Market Outlook and Review 6

9 Northern NSW permanent entitlement steady going Permanent entitlement prices are likely to remain steady in the Northern NSW systems for , with some upward pressure in those markets where parcels can be sold wet with allocation. According to Marsden Jacob s liaison with water market participants and stakeholders, in the northern MDB there is continued interest especially for general security entitlements in all catchments, but the ongoing challenge is finding sellers to match buyer demand. For these reasons, the market activity often is thin when purely looking at trade volumes. It will be interesting to see whether a similar step change in entitlement prices that has been experienced in the Southern Connected MDB will occur over time in the northern catchments. Marsden Jacob can see at least three good arguments against this: 1. Water is tightly held in these isolated catchments and the number of potential sellers is constrained; 2. Cotton is the predominant crop in these catchments, which means that the growers who own the permanent entitlements are not incentivised to sell since they can gain from buoyant prices; and 3. It can be argued that there is not much room for increase in the entitlement prices anyway as the market already reflects the returns from key commodities, particularly cotton margins. In addition to cotton growers who are always in the market for permanent water at a price, according to market feedback institutional investors are increasingly looking to Northern MDB as an investment opportunity as water markets in these systems are less saturated than in the MDB. However, it appears that investors are mainly considering water purchases in conjunction with property purchases instead of the traditional hold and sell water only strategy. The launch of ASX-listed Duxton Broadacre Farms (DBF) has increased such demand from the investor sector in the Lachlan. In addition to purchasing properties with water, DBF reports that thus far they ve acquired an additional 2,661ML of water entitlements to convert dryland into irrigated cropping 7. Market participants have also indicated that there is increasing interest from high value crop growers (e.g. almonds), especially in the Lachlan, to purchase more permanent water. It will be interesting to see how entitlement prices evolve in when water availability (carryover plus announced allocation) is anticipated to be much lower than in the previous two water years. In the northern catchments with relatively higher water supply, such as the Lachlan and Macquarie, we would not be surprised to see some wet parcels being traded this year at above $1, per ML in the Lachlan and above $1,5 per ML in the Macquarie. Elsewhere we anticipate that market activity will remain relatively thin and there will not be any significant upward pressure on prices. However, the Government s $1.5 billion Murray-Darling Basin Water Infrastructure Program may have an impact on the Northern MDB entitlement markets especially in Queensland where on-farm projects are eligible for funding. 7 Marsden Jacob 218 MDB Water Market Outlook and Review 7

10 MDB Water Markets in Review The water year witnessed strong demand for both temporary and permanent water across the Murray-Darling Basin (MDB). Consequently, new records were set for allocation trade volumes and entitlement prices in the Southern Connected MDB. Also the Northern NSW allocation market was active, underpinned by growers looking to maximise cotton yields. Allocation market Southern Connected Murray-Darling Basin After a wet , temporary water markets in the Southern Connected MDB had plentiful of supply in the form of carryover and announced allocations. When the supply was matched with dry conditions, below average inflows to storages, and high water demand and use, this resulted in a record year of allocation trade volumes with firm prices across all trading zones. More than 15, allocation trades were conducted during with more than 1,7GL traded both new records. Trade value was just short of $22 million, being the second highest on record (Figure 4). Figure 4. Southern Connected Murray-Darling Basin allocation market trade value and volume , $3 Trade volume ( ML) 1,6 1,2 8 4 $25 $2 $15 $1 $5 Trade value ($m) 29/1 21/11 211/12 212/13 213/14 214/15 215/16 216/17 217/18 Total volume traded (ML) Total value traded ($) $ Figure 5 summarises the allocation market prices and trading activity in the Southern Connected MDB. High demand early in the season led to strong prices in the first quarter, setting the tone for the rest of the year. After a strong start with firm prices the market softened slightly during summer, underpinned by some significant rain events. Prices firmed again towards the end of the season as the allocation outlooks for signalled lower water availability and market participants were purchasing allocation for carryover. Irrigators purchasing water to rebalance their accounts due to overuse, especially in South Australia, was another late season driver contributing to prices peaking at the tail end of the year. 8 The data used in this report excludes $ transactions and outliers Marsden Jacob 218 MDB Water Market Outlook and Review 8

11 Figure 5. Southern Connected Murray-Darling Basin allocation market summary VWAP ($/ML) Volume ( ML) Jul 214 Jan 215 Jul 215 Jan 216 Jul 216 Jan 217 Jul 217 Jan 218 Jul 218 Total Volume Southern Basin Goulburn Murrumbidgee Demand from annual cropping (especially cotton) in the Murrumbidgee was the key market driver early in the season. High demand in Murrumbidgee saw it become a net importer of water, which in October 217 led to the inter-valley trade closing for in-trade for the first time since September Restricted supply from other catchments and high intra-valley demand meant that Murrumbidgee allocation prices were consistently highest across in the Southern Basin throughout the water year (Figure 3) 1. The Goulburn system was isolated from the rest of the market for most of the season due to the Goulburn to Murray IVT trade limit being in place. In contrast to Murrumbidgee, the internal demand in the Goulburn was generally low, resulting in lower prices compared to other sub-markets as long as the IVT restriction was in place. The market prices across the remainder of the connected system were broadly similar throughout the season, albeit the Barmah Choke limit segregated trading zones above and below the Choke in the first half of the year with a typical $1 per ML price difference applying. The impact of trade limits is most evident when net trading patterns of are investigated (Figure 6); during the first quarter strong Murrumbidgee demand resulted in water being imported from NSW Murray. When the Murrumbidgee in-trade closed, NSW Murray became a net importer of allocation for the rest of the season. In contrast, Victorian Murray was a net exporter of allocation throughout the year. In the last quarter the Goulburn became the largest net exporter as the Goulburn to Murray trade opened up. Lower Darling trade restrictions took effect in January, resulting nil water leaving that system in the second half of data/assets/pdf_file/11/546689/media_release_1396_trade_imbalance.pdf 1 With the exception of June when Murrumbidgee trading had already ceased for licence holders outside of Coleambally Irrigation and Murrumbidgee Irrigation. Marsden Jacob 218 MDB Water Market Outlook and Review 9

12 Figure quarterly net trading patterns in the Southern Connected Murray-Darling Basin SA Murray Loddon Campaspe Goulburn VIC Murray NSW Murray Murrumbidgee Lower Darling -4, -3, -2, -1, 1, 2, 3, 4, 5, Net Change (ML) Q1 Q2 Q3 Q4 When annual net trading patterns of are compared to , it can be seen that for most systems the seasons were polar opposites. For instance, Goulburn and Victorian Murray turned from net importers to exporters of allocation, whereas the opposite happened to NSW and SA Murray. In the net water balance in the Murrumbidgee was effectively zero due to IVT out-trade being closed and relative lower demand (compared to connected zones), whereas in strong imports occurred before the IVT in-trade was shut down. Figure 7 summarises annual allocation movements between trade zones in and Figure 7. Annual net trading patterns in the Southern Connected Murray-Darling Basin SA Murray Loddon Campaspe Goulburn VIC Murray NSW Murray Murrumbidgee Lower Darling -8, -6, -4, -2, 2, 4, 6, 8, 1, Net Change (ML) 216/17 217/18 Marsden Jacob 218 MDB Water Market Outlook and Review 1

13 Allocation market Northern NSW Northern NSW catchments witnessed an increase in temporary trading activity as hot and dry conditions resulted in irrigators entering the market to purchase water to support summer crops. Off the back of a wet , large quantities of water were carried over ensuring supply to the market even though announced allocations were modest for most catchments. Buoyant commodity prices encouraged cotton growers to make the most of the crop especially since the sentiment is that water availability in will not be as high. Thus, during the peak irrigation period cotton growers purchased additional allocation water at higher than typical prices seen in some of the catchments (especially in the Namoi and Gwydir). In contrast, prices in the Macquarie and Lachlan did not peak during summer months. This was mostly due to those catchments being relatively in a better position in terms of water availability than the other Northern NSW catchments. After the peak irrigation period for cotton ceased, hot and dry conditions combined with higher relative availability (i.e. there was simply more water around to be traded) kept the allocation markets active in the Lachlan and Macquarie, whereas elsewhere in the Northern NSW trading activity was thin. In the final months of the season trading witnessed a small increase across Northern NSW markets which is understood to have resulted from irrigators managing their account balances to avoid water forfeitures (due to carryover and holding limits), and purchasing water for carryover. Figure 8 summarises the Northern NSW allocation market prices and trading activity. It is noteworthy that during the last two water years the price curves in the Lachlan and Macquarie have been identical, albeit at different price levels. Compared to Namoi, Gwydir and Border Rivers, these two catchments have slightly more variance in their crop mix, which may partly explain why their price movements are not as prone to mid-summer peak as is the case in cottondominated catchments. Figure 8. Northern NSW allocation market summary Price ($/ML) $5 $45 $4 $35 $3 $25 $2 $15 $1 $ Volume ( ML) $ Jul 212 Jan 213 Jul 213 Jan 214 Jul 214 Jan 215 Jul 215 Jan 216 Jul 216 Jan 217 Jul 217 Jan 218 Jul 218 Total trade volume Gwydir Lachlan Macquarie Namoi NSW Border Rivers When analysing market movements in the in the Northern NSW it has to be remembered that these markets are different to the Southern Connected MDB in a number of fundamental ways. For instance, market size is limited due to the lack of connectivity between systems. Moreover, many catchments have different accounting rules in place, which impacts the ability to hold and/or carry water over. To assist market participants with their account management strategies and trading decisions, we ve produced a blog post summarising the carryover, account and usage limits in each northern NSW catchment. Marsden Jacob 218 MDB Water Market Outlook and Review 11

14 Entitlement market Southern Connected Murray-Darling Basin After witnessing broadly stable prices in , new all-time high prices were achieved across most entitlement types in the Southern Connected MDB in as multiple buyers were competing for the parcels on offer. The price growth was particularly strong during the second half of the season. Nearly 2,2 entitlement trades were conducted during (on par with ), but the volume traded was 3% lower. The value traded also fell but the volume weighted average prices (VWAP) were significantly higher (see Tables 2 and 3 later in the report). Where the supply and demand side drivers of the Southern Connected MDB entitlement market are concerned, according to our analysis they ve been as follows throughout the year: The strength of the demand side continued to be underpinned by high confidence in irrigated agriculture, buoyant commodity prices (especially cotton), continued growth in higher value permanent crops, and geographical expansion of the growing area for certain crops (e.g. cotton expansion into the Murrumbidgee and Murray). On the demand side there were a mix of buyers (growers of various sizes and crop types, large corporations and investors) in the market with varying objectives, instead of a single group of buyers. Even though increasing entitlement prices may make it harder for institutional investors to reach their rule of thumb 6% return on investment, it has to be remembered that many of them have accumulated most of their water assets during times when entitlement prices were significantly lower, and thus buying additional entitlements does not have a major impact on the average price of their portfolio. On the supply side record high prices have attracted more sellers to enter the market, but thus far demand is understood to have exceeded supply. Irrigators are changing their mix of water markets products used and are thus supporting supply side liquidity by selling permanent entitlements to free up capital, and supplementing their annual water requirements through other market products (lease, spot and forward contracts). As multiple buyers in the market were competing for scarce parcels on offer, a number of price records were set, and continue to be set as the trades appear on the state water registers. Nearly all entitlement class prices are now at an all-time high (see Figures 9 and 1). Figure 9. Southern Connected MDB high security/reliability entitlement market summary 6, 7 VWAP ($/ML) 5, 4, 3, 2, Total Volume (ML) 1, 1 Jul 21 Jan 211 Jul 211 Jan 212 Jul 212 Jan 213 Jul 213 Jan 214 Jul 214 Jan 215 Total Volume SA Murray VIC Murray above BC Jul 215 Jan 216 VIC Murray below BC Goulburn NSW Murray Murrumbidgee Jul 216 Jan 217 Jul 217 Jan 218 Current Market Price Marsden Jacob 218 MDB Water Market Outlook and Review 12

15 Figure 1. Southern MDB general security/low reliability Entitlement market summary 2,5 4 VWAP ($/ML) 2, 1,5 1, Total Volume ( ML) Jul 21 Jan 211 Jul 211 Jan 212 Jul 212 Jan 213 Jul 213 Jan 214 Jul 214 Jan 215 Jul 215 Jan 216 Total Volume VIC Murray above BC VIC Murray below BC Goulburn NSW Murray Murrumbidgee Jul 216 Jan 217 Jul 217 Jan 218 Current Market Price As Figure 7 shows, a significant price increase was witnessed for low reliability and general security entitlements in Regarding the significant general security price increases in the Murray and Murrumbidgee, we believe that this can be partly explained by the geographical expansion of cotton to these areas. Buoyant cotton prices might have encouraged growers previously operating in northern NSW catchments to invest in southern MDB operations. It has to be remembered that cotton growers in the northern MDB are accustomed to both general security entitlement prices of +$2, per ML (e.g. in the Gwydir and Namoi) and paying $3 per ML for temporary water on a year on year basis. Hence, should these growers be looking to buy new properties in the south, they would most likely not be frightened by similar general security or temporary water prices. In addition, when we compare the average allocation yield of Murray and Murrumbidgee general security entitlements to those of northern catchments, we can conclude that from a water security perspective southern MDB entitlements are generally equally or more reliable and certainly less volatile (Table 4). Table 5. NSW general security entitlement allocation yield comparison Murrumbidgee GS NSW Murray GS Gwydir GS Lachlan GS Macquarie GS Lower Namoi GS Upper Namoi GS 28/9 21.% 9.%.%.% 1.% 23.8% 5.% 29/1 27.% 27.%.%.%.%.6% 5.% 21/11 1.% 1.% 82.8% 117.% 1.% 19.7% 1.% 211/12 1.% 1.% 36.9% 136.% 49.% 116.6% 1.% 212/13 1.% 1.% 162.4%.% 64.% 48.8% 1.% 213/14 63.% 1.%.%.% 6.% 6.4% 1.% 214/15 53.% 61.%.%.% 2.%.% 1.% 215/16 37.% 23.% 5.3% 25.% 7.%.% 6.% 216/17 1.% 1.% 78.6% 131.% 1.% 124.7% 1.% 217/18 45.% 51.% 17.6% 2.% 38.% 7.1% 1.% 1 year average 64.6% 67.1% 65.4% 41.1% 37.6% 43.8% 86.% Source: NSW Water Register, Marsden Jacob analysis Market psychology might have also contributed to increasing general security prices. As high security prices have increased, general security sellers are prone to think that the gap between general and high security prices should not be too wide, and that general security prices should also increase. Marsden Jacob 218 MDB Water Market Outlook and Review 13

16 Where Victorian low reliability entitlements are concerned, the market witnessed significant buy interest throughout the year. Market participants across the Southern Connected MDB are increasingly recognising the value of these entitlements as a carryover instrument, such that market demand is understood to be consistently exceeding supply. As buyers were competing for the scarce parcels on offer, record prices have been achieved recently. Consequently, low reliability entitlement prices have effectively doubled over the last months. Trading activity in the Southern MDB entitlement markets is summarised in Tables 5 and 6. The volume-weighted average price reached an all-time high in for both high reliability/security and low reliability and general security entitlements. However, trade volumes decreased in both cases from , implying that finding entitlement sellers to match the high buyer demand was a key constraint. Table 6. Southern MDB entitlement trade summary high reliability / security Number of trades 1,87 1,74 2,181 1,917 1,638 1,719 Volume traded (GL) Total value traded ($m) Yearly VWAP ($/ML) 1,583 1,452 1,636 2,51 2,832 3,24 Monthly VWAP range ($/ML) 1, - 2,15 1, - 1,769 1, - 2,3 1,16-3,8 1,6-3,63 1,673-4,255 Table 7. Southern MDB entitlement trade summary low reliability / general security Number of trades Volume traded (GL) Total value traded ($m) Yearly VWAP ($/ML) ,25 Monthly VWAP range ($/ML) , , , ,8 Entitlement market Northern NSW Compared to the Southern Connected MDB, the entitlement market in the Northern NSW was uneventful throughout the season. The ongoing challenge is to find water sellers to match the buyer demand as entitlements are tightly held. In terms of prices, notable increases for general security entitlements have been observed in the Lachlan, Namoi and in the Macquarie during the past months (Figure 11). This can be equally attributed to strong demand and more parcels being sold wet with allocation water. As allocation prices in ranged between $11-45 per ML across the Northern NSW catchments, the price difference between a wet and a dry parcel could have been significant. Looking at the entitlement prices on a longer term, it can be found that prices in the Lachlan and both Upper and Lower Namoi are at all-time highs or very close to it. This can be mostly attributed to increased confidence and optimism around agriculture, which is underpinned by e.g. strong prices for cotton, growth of higher value permanent crops (such as citrus and almonds in the Lower Lachlan) and strong commodity values in the broadacre sector (for example, strong wool and sheep meat prices). Marsden Jacob 218 MDB Water Market Outlook and Review 14

17 Figure 11. Northern NSW general security entitlement market summary 4,5 35 VWAP ($/ML) 4, 3,5 3, 2,5 2, 1,5 1, Volume ( ML) Jul 214 Jan 215 Jul 215 Jan 216 Jul 216 Total Volume Macquarie Gwydir Lower Namoi Upper Namoi Lachlan Jan 217 Jul 217 NSW Border Rivers GS-A NSW Border Rivers GS-B Jan 218 Current Market Price Northern NSW general security entitlement trading activity is summarised in Table 7. The volume and value of trades for general security entitlements reached a six year high in However, we note that the there may be a bias in these figures namely, the significant spike in October 217 trading volumes (see Figure 8) can be explained by several large whole of licence transfers in the Gwydir. Marsden Jacob understands that most of these transactions were in relation to a large agricultural corporation restructuring their water holdings under a new business entity. Hence, these transactions may not reflect arms-length trades, albeit they were recorded in the water register with prices that were in line with the market values at the time. Table 8. Northern MDB entitlement trade summary general security Number of trades Volume traded (GL) Total value traded ($m) Yearly VWAP ($/ML) 1,548 1,591 1,499 1,363 1,47 1,722 Monthly VWAP range ($/ML) 35-3, , , , 424-4, 572-3,85 Marsden Jacob 218 MDB Water Market Outlook and Review 15

18 Want to discuss further? If you want to really understand what s happening with Australian water markets, policy, trade rules and opportunities, give us a call. Australian water market consists of multiple levels of legislation governed by a large number of regulators. Market information is scattered and trading rules often hard to interpret. To make the best-informed decisions, you need the best independent advice, backed by deep expertise and real practical experience that can only be gained from direct experience in markets. Marsden Jacob Associates is a leading independent water market advisory practice. We offer independent, end-toend in-house service across market policy and design, water portfolio optimisation, market trading strategies, market reporting, valuation and analysis, commercial due diligence, developing new water market products, and application of water trading rules across Australia. Waterflow - Calling for testers Marsden Jacob is currently developing Waterflow an application that aggregates water market information to make it easier for you to undertake water market related research. A beta version is now available for testing and we d love to get your feedback. If you d like to be involved, please contact us and we ll organise a test account for you. Simo Tervonen Rod Carr E stervonen@marsdenjacob.com.au M E rcarr@marsdenjacob.com.au M marsdenjacob.com.au waterflow.io Disclaimer The professional analysis and advice in this report has been prepared by Marsden Jacob Associates. This report is supplied in good faith and reflects the knowledge, expertise and experience of the consultants involved. In conducting the analysis for this report Marsden Jacob Associates has endeavoured to use what it considers is the best information available at the date of publication. Although Marsden Jacob Associates exercises reasonable care in its analysis and when making forecasts or projections, factors in the process (such as future market behaviour) are inherently uncertain and cannot be forecast or projected reliably. Marsden Jacob Associates makes no representation or warranty as to the accuracy of any calculation, projection, assumption or estimate contained in this report. The contents of this document do not constitute legal, financial or commercial advice, or a recommendation of any services or products. You should consider obtaining independent advice before making any investment, financial or legal decision. To the extent permitted by law, Marsden Jacob disclaim any liability whatsoever in connection with, reliance upon or the use of this document. Marsden Jacob 218 MDB Water Market Outlook and Review 16